2ND UPDATE: Plot To Blow Up Planes Thwarted By British Authorities

WASHINGTON (Dow Jones) — Nearly five years after the 9/11 terror attacks, British authorities say they have thwarted a plot to blow up several transatlantic airliners in midair with liquid explosives smuggled on board.

More than 20 people were under arrest in the United Kingdom in connection with the alleged plan to commit "mass murder on an unimaginable scale," British security services said Thursday. News reports said the plotters were targeting between six and 10 flights from the United Kingdom to the United States. Those arrested were all British citizens of Asian descent, the reports said. Most have ties to Pakistan.

A number of other suspects were arrested in Pakistan, the Associated Press reported, citing a Pakistani Foreign Ministry spokeswoman.

The new threat disclosed Thursday disrupted air travel, unsettled financial markets and prompted the highest level of security on both sides of the Atlantic.

U.S. Homeland Security Secretary Michael Chertoff said the plot had the look of an al-Qaida operation, but said no firm conclusions could be reached yet. The plot was in a "well-advanced" stage, he said.

A spokesman for Scotland Yard’s antiterrorism branch said a large group of people had been under surveillance for months. "The investigation reached a critical point last night when the decision was made to take urgent action in order to disrupt what we believe was being planned," said Peter Clarke, deputy assistant commissioner of the antiterror squad.

John Reid, Britain’s home secretary, said police are confident "major players" have been apprehended.

Security officials said the terrorists planned to smuggle liquid explosives aboard the planes in beverages. The detonation charge would have come from a small electronic device. The explosives could have been smuggled in two containers and then mixed once on board to create an explosive powerful enough to bring down a large commercial jet, the BBC reported. A similar plot was planned by al-Qaida in 1994.

Al-Qaida has had a long history of targeting airplanes. Its operatives were responsible for hijacking the planes on Sept. 11, 2001, that crashed into the World Trade Center and the Pentagon. Another plane was heading for the U.S. Capitol it crashed in Pennsylvania as passengers fought back. Nearly 3,000 people perished in those attacks.

Another man with al-Qaida connections, British-born Richard Reid, was convicted of trying to blow up a plane in December 2001 with a bomb in his shoe. He was thwarted by passengers.

Impact on air travel

Following the arrests late Wednesday, Britain’s national security threat level was raised to "critical" from "severe." The U.S. government raised its threat level for commercial flights to and from Britain to "severe," its highest level, while domestic and other international flights were raised to "high" alert. "We cannot be sure that the threat has been entirely eliminated," U.S. Homeland Security said.

Thousands of flights in the U.K. were canceled. Passengers were not allowed to bring any carry-on luggage on board flights departing in the U.K. All passengers were hand searched, and all items X-rayed, a spokesman for airports operator BAA said. Mothers were being asked to taste baby milk they were bringing on board.

In the United States, passengers were barred from taking liquids on board planes, the Department of Homeland Security said.

Long delays were reported at U.S. airports as stricter screening procedures were rushed into place. The disruption to the nation’s air travel system was only the latest in a series of problems for the industry.

Impact on markets

Global financial markets reacted quickly to the news. At mid-day, U.S. stocks were modestly higher. Treasurys, oil and gold were trading lower.

Crude-oil prices fell more than $2 to trade at $74 a barrel Thursday on concern that demand for jet fuel may decline.

The FTSE 100, the main U.K. stock market index, dropped as much as 1.8%, but shed losses in late trading after American markets turned positive.

The British pound fell against the dollar.

Flights from Continental Airlines (CAL) , American Airlines (AMR) and United Airlines (UAUA) were targeted, the Associated Press and Agence France-Presse reported, citing unnamed people involved in U.S. counterterrorism. All three stocks were trading lower, but off the lows of the day.

Shares of hotel chains were also lower.Shares of security-related companies rose.

Political fallout

Politicians responded to the report of the alleged plot.

"This country is safer than it was prior to 9/11," said President Bush. "We’ve taken a lot of measures to protect the American people. But obviously we still aren’t completely safe, because there are people that still plot and people who want to harm us for what we believe in."

But Democrats said the war on terror has not gone well. "The Iraq war has diverted our focus and more than $300 billion in resources from the war on terrorism and has created a rallying cry for international terrorists," said Sen. Harry Reid, D-Nev.

The foiled plot shows that al-Qaida’s operational capability has been degraded, while British intelligence has been able to infiltrate the secretive group, said George Freeman, head of Stratfor.com, an intelligence analysis firm. "Though al Qaeda remains a threat, it is not the strategic threat it once was," he wrote to clients.

"We are learning again that there are no walls high enough, no bombs big enough, no surveillance foolproof enough to protect us completely from terrorism in a globalized world," said David Potorti, a member of September Eleventh Families for Peaceful Tomorrows. "In the long term, security is going to come only when individuals around the world unite in recognizing their common interests, supporting voices of moderation, and acknowledging and engaging the root causes of extremism in their own communities."

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